Investors Sell Kuwait Stocks as Thousands Protest

More than one hundred people were wounded after a large protest against changes in the electoral law in Kuwait escalated late on Sunday. Security forces moved in to disperse the crowd, estimated to have been in the tens of thousands, using tear gas and stun grenades.

Yasser Al-Zayyat | AFP | Getty Images

"Political wrangling has led to a real paralysis, and major needed reform projects cannot go through", Philippe Dauba-Pantanacce, senior economist for the Middle East, North Africa and Turkey at Standard Chartered, told CNBC.

Investors sold heavily in Sunday trade, resulting in a three percent decline in Kuwait's stock market and the biggest one-day price drop since July 2009. The index edged down 0.2 percent on Monday.

"Sentiment in the stock market is set to remain muted, until there is some common ground for both sides to come to an agreement, although Kuwait seems to have been going around in the same circle for some time," Angus Blair, founder of the Signet Institute, a Cairo-based think tank told CNBC.

Kuwait, home to one of the most liberal political systems among Gulf monarchies, has muddled through a prolonged period of political stagnation that took another twist after the Emir, Sheikh Sabah Al-Ahmad Al-Sabah dissolved parliament earlier this month. The opposition described the latest changes in the electoral law, which essentially allows voters only one candidate per given district, as a "constitutional coup" by the government. A vote for the law has been slated for December 1.

In a speech on Friday, the country's ruler warned about "strife that could be about to erupt and destroy our unity, disfigure our identity and tear apart our society into fragmented groups".

A U.S. Congressional Report in June stated that disputes "have taken the form of infighting between oppositionists in the elected National Assembly and the ruling Al-Sabah family, primarily over the political and economic dominance of the Al-Sabah."

Kuwait is important both strategically and for the oil markets, which depend on its supplies. Out of a population of 2.8 million, locals constitute the minority in the state that holds the sixth largest oil reserves in the world, and produced 2.9 million barrels per day (bpd) in September according to OPEC. Local consumption is limited, allowing for exports of 2.1 million bpd in August, a report by the Joint Organizations Data Initiative (JODI) shows.

The clashes and subsequent arrests are a serious development when considering that thus far, the country has been able to escape the violent wave of political liberalization that accompanied the Arab Spring. It now raises renewed concerns about whether the strategy of big government handouts can equate to prolonged political stability among Gulf oil powers and historically important U.S. allies.

"The very large demonstration yesterday is the clearest sign yet that the political status quo will have to evolve or face further challenges," Blair explained.

Kuwait piled more on its spending bill in the beginning of the year through additional support measures for newly-married couples to the tune of $21,000 and interest-free loans. The higher wages plus giveaways have left behind a bloated budget.

"While the public finances can surely absorb this, it does create a ratchet effect as it becomes almost impossible to backtrack on this sort of structural, recurrent spending," Dauba-Pantanacce added.

The expenditures seemingly reached a tipping point when the country's former central bank governor resigned in February after serving one of the longest tenures for a man in his position. He left by stating the "unprecedented" rise in outflows jeopardized the institution's mandate.

With a $47 billion surplus in the last fiscal year, there's arguably plenty of money to go around. But the debilitating political atmosphere has also hit foreign investor appetite in the OPEC-member state. Dauba-Pantanacce is convinced that although it may be affordable for the moment, the risks are growing rapidly.

"The direct effect is increased vulnerability toward oil prices and a constant rise in the oil fiscal breakeven point".